Biomass plant nearly finished, but issues remain

Published: Sunday, February 17, 2013 at 6:01 a.m.

Last Modified: Saturday, February 16, 2013 at 10:01 p.m.

Correction: The energy firms behind the Gainesville Renewable Energy Center sold a biomass plant in Austin, Texas, to Southern Company. The Gainesville biomass plant has not been sold to Southern Company. An earlier version of this article stated otherwise. Also, the current electric fuel adjustment charge for Gainesville Regional Utilties is 5.1 cents per kilowatt-hour, and GRU officials have said that rate would rise to approximately 7.5 cents when the biomass plant comes online without the fuel levelization fund or other steps to limit rate increases.

After two years, an estimated 1.6 million hours and as many as 700 workers on site at the peak of construction, the Gainesville biomass plant off U.S. 441 is 85 percent complete.

Its boiler is taller than the Seagle Building — the tallest in downtown Gainesville — but even more visually dramatic are the conveyor arms that stretch like some super-sized water slide.

Later this year, those conveyors will begin carrying wood debris that will be burned to generate electrical power to feed into the Gainesville Regional Utilities system.

The 100-megawatt plant will be ready to feed power into the GRU grid by September, said Al Morales, the chief financial officer with the Gainesville Renewable Energy Center.

Construction nears completion as electric rate increases loom, a legal battle between the city and GREC unfolds and organized opposition continues in the midst of a city election cycle that includes a race for mayor.

Sister plant idle

In Texas, a sister biomass plant — a 100-megawatt station initially proposed by the same energy firms that formed GREC before being sold to Southern Company — sits idle. The city of Austin, which has a 20-year contract to purchase all the plant's output, has decided the electricity is too expensive to purchase, even as the city continues to pay the fixed operating costs associated with the plant, according to the Austin American-Statesman newspaper.

On Thursday, the Austin City Council unanimously voted to move toward establishing an independent board with utility expertise to oversee Austin Energy, a move predicated in part by a recent rate increase and the biomass plant, according to the American-Statesman.

Locally, state Rep. Keith Perry, R-Gainesville, is considering filing legislation that would require a referendum of all GRU customers, including those in the unincorporated county, to determine if the governance of GRU should be moved to an independent board. Perry said he has submitted potential legislation but has not made a final decision on whether he will formally file it.

“This is not specifically to do with the biomass plant,” Perry said. “What I'm looking at is the fairness of the way it is structured now.”

Efforts to hold down rates

Meanwhile, GRU continues to pursue ways, including some that have stirred opposition of their own, to hold down electric rate increases when the biomass plant comes online on Oct. 1.

GRU's goal is to limit rate increases to residential users to $10.56 per 1,000 kilowatt hours, on top of the $127.67 per 1,000 kWh they pay now. The current rate is the fifth highest of the state's 33 public utilities for that usage level, according to the most recent monthly report from the Florida Municipal Electric Association.

When the City Commission approved the biomass contract in May 2009, officials said they hoped additional steps could limit the rate increase to $6.10 a month.

But natural gas prices dropped, and cap and trade legislation and a requirement for Florida utilities to have a renewable energy portfolio never materialized. Against that backdrop, Gainesville so far has been unable to find a wholesale buyer for electricity from the biomass plant. The initial plan was to sell half the output for 10 years.

Now, $10.56 per 1,000 kWh is no longer a projected high-end rate increase that the city will work down from. It's now the rate increase they hope to hit.

$103 million annual cost

With City Commission budget hearings coming in the summer, GRU has to mitigate several million dollars in biomass-related costs in order to hit its target rate increase. GRU General Manager Bob Hunzinger said he feels the utility will reach the target.

“We're still comfortable with the $10.56 or the penny per kilowatt-hour,” he said.

The biomass plant's estimated annual cost to GRU customers is $103 million — $70 million in annual fixed costs that the city will pay GREC and $33 million in discretionary and fuel-related costs if the plant is running.

GRU's focus is the $70 million in fixed costs the city will pay even if the plant is idle. Two plans once considered to limit rate increases — negotiations with GREC on a prepay agreement and the sale of wholesale power — have not been successful.

Another option GRU identified — adding no additional capacity to the solar feed-in tariff program — did not gain traction with the City Commission.

The commission voted 6-1, with Todd Chase in dissent, to add projects to the feed-in tariff program, which pays a premium for solar-generated electricity.

Target proves elusive

So where does GRU stand currently?

The decision to let a contract to purchase power from Progress Energy expire will mean $12 million in savings. A bond refinancing that will lower the utility's annual debt payments for the first several years the plant is online — but increase debt payments down the road — will save $10 million to $13 million, Hunzinger said.

A rate increase of $10.56 per 1,000 kWh would generate about $20 million annually. Hunzinger said that leaves the city with $25 million to $28 million to address annually in order to pay for the $70 million in fixed costs for the biomass plant.

Other steps in the mix could mitigate about $18 million annually, he said. They include putting GRU cash set aside for capital projects instead toward debt payments and a hotly debated decision to build up a fuel levelization fund now in the range of $23 million. Instead of lowering electric rates when the utility's fuel costs declined, the city has held them steady to build up that fund.

In some months, the impact of that plan on a customer's bill has been above the $10.56-per-1,000 kWh target rate increase.

In October, for instance, it was almost $15 per 1,000 kWh.

During a Jan. 9 workshop held to settle a lawsuit over the biomass contract, Hunzinger said that, without this fuel levelization fund, a customer's monthly fuel adjustment charge would rise from the current 5.1 cents per kilowatt-hour to about 7.5 when biomass comes online — if the city took no other steps to mitigate. At 1,000 kWh usage, that would, without other steps to limit rate increases, mean a monthly impact in the range of $24.

For the past five months, the City Attorney's Office has been working on a legal opinion regarding the fuel adjustment charge and this fuel levelization fund. Commissioners requested the legal opinion in response to allegations the utility has been overcharging customers.

At this point, Hunzinger said the utility still has to address about $7 million to $10 million of the annual $70 million in fixed costs in order to hit the target rate increase. Some steps toward that could include a reduction in the transfer of GRU revenues to the city's general fund.

Long-term impact debated

Chase, who has been outspoken in concerns over the financial impact of the biomass plant, also opposes some of the steps the city has taken to limit rate impacts.

He said he is concerned that steps such as bond refinancing and the use of capital project monies in the utility plant improvement fund to limit rate impacts in the short term could have long-term negative effects on the utility's finances and bond rating.

“The important thing to me is not whether we hit $10.56,” Chase said. “It's how we hit it and how long we can sustain it … The next five to 10 years on this thing is very worrisome to me.”

Commissioner Lauren Poe said he is holding off on making projections on the rate increases associated with biomass until budget meetings for next fiscal year begin.

“It's really premature right now to make any sort of determination on what rates will be,” Poe said. “Management has very direct guidance from the commission to limit the rate impact, and that is what they are working on now.”

Meanwhile, GREC officials have indicated no interest in voluntary negotiation of the contract.

Morales said it would “oversimplify” the situation to say the company could enter such talks when equity investors and lenders put nearly $500 million toward the plant based on the contract's terms.

In response to calls from some for GRU to attempt to terminate the contract, Morales said Gainesville has made legally binding commitments and that “walking away from commitments would have negative consequences.”

<p><i>Correction: The energy firms behind the Gainesville Renewable Energy Center sold a biomass plant in Austin, Texas, to Southern Company. The Gainesville biomass plant has not been sold to Southern Company. An earlier version of this article stated otherwise. Also, the current electric fuel adjustment charge for Gainesville Regional Utilties is 5.1 cents per kilowatt-hour, and GRU officials have said that rate would rise to approximately 7.5 cents when the biomass plant comes online without the fuel levelization fund or other steps to limit rate increases.</i></p><p>After two years, an estimated 1.6 million hours and as many as 700 workers on site at the peak of construction, the Gainesville biomass plant off U.S. 441 is 85 percent complete.</p><p>Its boiler is taller than the Seagle Building — the tallest in downtown Gainesville — but even more visually dramatic are the conveyor arms that stretch like some super-sized water slide.</p><p>Later this year, those conveyors will begin carrying wood debris that will be burned to generate electrical power to feed into the Gainesville Regional Utilities system.</p><p>The 100-megawatt plant will be ready to feed power into the GRU grid by September, said Al Morales, the chief financial officer with the Gainesville Renewable Energy Center.</p><p>Construction nears completion as electric rate increases loom, a legal battle between the city and GREC unfolds and organized opposition continues in the midst of a city election cycle that includes a race for mayor.</p><p><b>Sister plant idle</b></p><p>In Texas, a sister biomass plant — a 100-megawatt station initially proposed by the same energy firms that formed GREC before being sold to Southern Company — sits idle. The city of Austin, which has a 20-year contract to purchase all the plant's output, has decided the electricity is too expensive to purchase, even as the city continues to pay the fixed operating costs associated with the plant, according to the Austin American-Statesman newspaper.</p><p>On Thursday, the Austin City Council unanimously voted to move toward establishing an independent board with utility expertise to oversee Austin Energy, a move predicated in part by a recent rate increase and the biomass plant, according to the American-Statesman.</p><p>Locally, state Rep. Keith Perry, R-Gainesville, is considering filing legislation that would require a referendum of all GRU customers, including those in the unincorporated county, to determine if the governance of GRU should be moved to an independent board. Perry said he has submitted potential legislation but has not made a final decision on whether he will formally file it.</p><p>“This is not specifically to do with the biomass plant,” Perry said. “What I'm looking at is the fairness of the way it is structured now.”</p><p><b>Efforts to hold down rates</b></p><p>Meanwhile, GRU continues to pursue ways, including some that have stirred opposition of their own, to hold down electric rate increases when the biomass plant comes online on Oct. 1.</p><p>GRU's goal is to limit rate increases to residential users to $10.56 per 1,000 kilowatt hours, on top of the $127.67 per 1,000 kWh they pay now. The current rate is the fifth highest of the state's 33 public utilities for that usage level, according to the most recent monthly report from the Florida Municipal Electric Association.</p><p>When the City Commission approved the biomass contract in May 2009, officials said they hoped additional steps could limit the rate increase to $6.10 a month.</p><p>But natural gas prices dropped, and cap and trade legislation and a requirement for Florida utilities to have a renewable energy portfolio never materialized. Against that backdrop, Gainesville so far has been unable to find a wholesale buyer for electricity from the biomass plant. The initial plan was to sell half the output for 10 years.</p><p>Now, $10.56 per 1,000 kWh is no longer a projected high-end rate increase that the city will work down from. It's now the rate increase they hope to hit.</p><p><b>$103 million annual cost</b></p><p>With City Commission budget hearings coming in the summer, GRU has to mitigate several million dollars in biomass-related costs in order to hit its target rate increase. GRU General Manager Bob Hunzinger said he feels the utility will reach the target.</p><p>“We're still comfortable with the $10.56 or the penny per kilowatt-hour,” he said.</p><p>The biomass plant's estimated annual cost to GRU customers is $103 million — $70 million in annual fixed costs that the city will pay GREC and $33 million in discretionary and fuel-related costs if the plant is running.</p><p>GRU's focus is the $70 million in fixed costs the city will pay even if the plant is idle. Two plans once considered to limit rate increases — negotiations with GREC on a prepay agreement and the sale of wholesale power — have not been successful.</p><p>Another option GRU identified — adding no additional capacity to the solar feed-in tariff program — did not gain traction with the City Commission.</p><p>The commission voted 6-1, with Todd Chase in dissent, to add projects to the feed-in tariff program, which pays a premium for solar-generated electricity.</p><p><b>Target proves elusive</b></p><p>So where does GRU stand currently?</p><p>The decision to let a contract to purchase power from Progress Energy expire will mean $12 million in savings. A bond refinancing that will lower the utility's annual debt payments for the first several years the plant is online — but increase debt payments down the road — will save $10 million to $13 million, Hunzinger said.</p><p>A rate increase of $10.56 per 1,000 kWh would generate about $20 million annually. Hunzinger said that leaves the city with $25 million to $28 million to address annually in order to pay for the $70 million in fixed costs for the biomass plant.</p><p>Other steps in the mix could mitigate about $18 million annually, he said. They include putting GRU cash set aside for capital projects instead toward debt payments and a hotly debated decision to build up a fuel levelization fund now in the range of $23 million. Instead of lowering electric rates when the utility's fuel costs declined, the city has held them steady to build up that fund.</p><p>In some months, the impact of that plan on a customer's bill has been above the $10.56-per-1,000 kWh target rate increase.</p><p>In October, for instance, it was almost $15 per 1,000 kWh.</p><p>During a Jan. 9 workshop held to settle a lawsuit over the biomass contract, Hunzinger said that, without this fuel levelization fund, a customer's monthly fuel adjustment charge would rise from the current 5.1 cents per kilowatt-hour to about 7.5 when biomass comes online — if the city took no other steps to mitigate. At 1,000 kWh usage, that would, without other steps to limit rate increases, mean a monthly impact in the range of $24.</p><p>For the past five months, the City Attorney's Office has been working on a legal opinion regarding the fuel adjustment charge and this fuel levelization fund. Commissioners requested the legal opinion in response to allegations the utility has been overcharging customers.</p><p>At this point, Hunzinger said the utility still has to address about $7 million to $10 million of the annual $70 million in fixed costs in order to hit the target rate increase. Some steps toward that could include a reduction in the transfer of GRU revenues to the city's general fund.</p><p><b>Long-term impact debated</b></p><p>Chase, who has been outspoken in concerns over the financial impact of the biomass plant, also opposes some of the steps the city has taken to limit rate impacts.</p><p>He said he is concerned that steps such as bond refinancing and the use of capital project monies in the utility plant improvement fund to limit rate impacts in the short term could have long-term negative effects on the utility's finances and bond rating.</p><p>“The important thing to me is not whether we hit $10.56,” Chase said. “It's how we hit it and how long we can sustain it … The next five to 10 years on this thing is very worrisome to me.”</p><p>Commissioner Lauren Poe said he is holding off on making projections on the rate increases associated with biomass until budget meetings for next fiscal year begin.</p><p>“It's really premature right now to make any sort of determination on what rates will be,” Poe said. “Management has very direct guidance from the commission to limit the rate impact, and that is what they are working on now.”</p><p>Meanwhile, GREC officials have indicated no interest in voluntary negotiation of the contract.</p><p>Morales said it would “oversimplify” the situation to say the company could enter such talks when equity investors and lenders put nearly $500 million toward the plant based on the contract's terms.</p><p>In response to calls from some for GRU to attempt to terminate the contract, Morales said Gainesville has made legally binding commitments and that “walking away from commitments would have negative consequences.”</p>